Report hints at why BMO went to 2.99%

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New analyst reports are hinting at why BMO moved to offer that trendsetting 2.99 per cent rate, at the same time suggesting the offer may come back to bite it – and, indeed, the industry.

The big bank trod out that historical interest rate early last month, kicking off three weeks of the unprecedented originations activity for January, usually one of the slowest months for mortgage specialists and brokers, alike.

But that move – meant to increase revenue at the tail end of a challenging quarter – may not have been enough.

New York-based investment bank KBW Inc.is now forecasting first quarter earnings for BMO will fall short of “consensus expectations,” despite the special rate offer in January.

Both RBC and CIBC are in the same boat, according to the KBW forecast, although Scotia and TD should actually beat analyst expectations.

Still, BMO’s special rate offer may have consequences for all banks and mortgage brokers, with KBW analysts suggesting the ensuing spate of mortgage activity, spurred on by January’s rate wars, will factor into any government plans to tighten mortgage rules.

The KBW report warns that deeply discounted “teaser” rates could encourage the Finance minister to reduce mortgage availability as a way of further slowing consumer household debt increases.

The analysts also referred to CMHC’s January caution about the future availability of portfolio insurance for lenders as an indication of the government’s concerns about a possible continuation of the A and Alt-A mortgage growth the industry saw in 2011.

Today’s regulatory uncertainty – specifically, will the government further restrict mortgage rules or not? – will make 2012 a more challenging year than last for mortgage originators, argues another report released Monday.

"Last year Canadian banks presented solid results, primarily thanks to their strong retail banking businesses and growth in loan portfolios," said PwC's Canadian financial services leader Diane Kazarian. "However, 2012 may see slowing growth in consumer credit markets and continued pressure on  margins as banks battle for market share."

  • David Larock on 2012-02-28 5:03:00 AM

    The KBW report mislabels BMO’s 2.99% rate as a "teaser rate". Teaser rates were used in the U.S. during the formation of their debt bubble. For example: U.S. borrowers would secure a mortgage with a thirty-year fixed rate which came with two-year introductory rate that was well below the interest rate to be applied for the remaining twenty-eight years. Amazingly, lenders also used the introductory rate to qualify borrowers and counselled them to just keep refinancing when the two-year introductory period expired.

    Thankfully, teaser rates have been almost non-existent in Canada and in actual fact, BMO’s 2.99% rate was for a standard five-year fixed-rate term (with restrictions added to the terms and conditions). If KBW wants to comment on the Canadian mortgage market, perhaps its researchers should start by learning how it actually works.

    The other report “(released last Monday)” that says that 2012 will be a challenging year for mortgage originators because of uncertainty about more mortgage rule changes flies in the face of three years of direct precedent. In reality, new mortgage changes have caused mortgage applications to surge as buyers try get their loans in ahead of the new restrictions. Thus, if past is prologue, fear of more changes should cause a spike in 2012 volumes, and would only have a negative impact over a longer time horizon.

  • Ron Butler on 2012-02-28 7:53:06 AM

    Mr. Larock has made excellent, logical points. The only thing I would add applies to his last sentence: what will happen to our business when we finally arrive at the point of the "longer time horizon"?

  • John Dearin RPA,. AMP. on 2012-02-29 12:12:32 AM

    I believe CIBC First line is still offering teaser rates, as low as 0.89%, at least one of my competitors are advertising this. I don't deal with CIBC first line

  • David Larock on 2012-02-29 3:10:44 AM

    Hi John,
    FYI - the teaser-rate promotion you mention would not be offered by FirstLine, but rather by a broker who is trying to burn through his/her FirstLine "Basis Points" while they are still worth something. On an overall basis, I think teaser rates like the one you highlight would only account for a tiny percentage of overall mortgage originations.

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